Has India reached its limits as an offshore development hub?

Russia is poised to be a major player in the offshore outsourcing market with hourly contractor rates around 40 per cent lower than the market leader India.

Contractor rates in Russia are around $US25 an hour compared to India which commands up to $US40.

However, analysts claim the offshore outsourcing market is far from saturated, but Russia's biggest obstacle is overcoming Western prejudices, some factually based, others mere prejudices.

As an offshore outsourcing site, IDC analyst Vladimir Kroa said Russia has a number of advantages including a highly educated workforce, particularly in the high-tech sector, with the required IT infrastructure in place in cities like Moscow and St Petersburg.

"And the prices here are still competitive, even compared with India and China," he said.

A recent study by McKinsey & Co predicts China will be able to offer the same quality of skills as development hubs like India for 15 to 20 per cent less within two years. And according to a recent Arthur Andersen report, the rates for Vietnam developers were as low as $US11 an hour.

For Russia, lingering negative perceptions by Western executives are a real disadvantage, Kroa said, but some, like the belief that Russian companies lack the English language skills of their Indian counterparts, have a basis in fact. Others, he said, are simply remnants of Cold War attitudes.

"Unfortunately, the idea that Russians can't do a job on time and are sloppy, remains," Kroa said.

Nearly three-quarters of offshore development work in Russia is undertaken by IT companies, according to Aberdeen Group analyst Stephen Lane. IT companies are setting up development centres in Russia to help build a market there, and are using Russian talent for high-end development.

"What they have is a culture focused on problem solving and focused on using technology in an innovative fashion," Lane said. But there is not a Russian company out there that can compete with an Indian company in scale or scope, he said.

Gartner analyst Ian Marriott said many companies are still realising outsourcing is a reliable way of doing business and a drift towards the idea that while companies need IT infrastructure, they don't necessarily need to own it.

He said offshore outsourcing has resisted the global IT downturn and continues to record strong growth figures.

Indian companies have been the main beneficiaries, he said, adding that last year outsourcing deals in India were worth $US10 billion, or 85 per cent of the entire outsourcing market.

But Indian companies are already reaching the limit of how much outsourcing they can handle with some already subcontracting work to other countries, especially China. That provides an opening for companies in other developing countries.

"Until now, all we've heard about is India, but now people are talking more and more about Russia, China and others," Marriott said. "We expect that over the next decade the Indian cut of the total outsourcing market will decline."

However, before considering emerging providers in less established markets like China, Russia or Poland, Ananda Rao, manager for Australia of
Indian software developer Infosys Technologies, said customers must understand the three dimensions of outsourcing: time to benefit, cost, and quality.

Enterprises can determine if they will tap desired business results in outsourcing by looking beyond what Rao calls "plain costs".

"Rather than just the cost of setting up a development centre, the broader issues of education and communications infrastructure dominate," he said.

Any outsourcing provider must have an abundance of suitably skilled resources; this will determine which countries IT outsourcing contracts gravitate towards, Rao said.

"It took over eight years of relentless effort for India to get where it is today, and the main commodity - qualified people – were there in plenty," he said.

"It will be a hard act for others to do this any quicker to reach the same scale."

Copyright 2018 IDG Communications. ABN 14 001 592 650. All rights reserved. Reproduction in whole or in part in any form or medium without express written permission of IDG Communications is prohibited.